Weekly Briefing 12/20/20 - The Forecast

Weekly Briefing 12/20/20

Weekly Briefing 12/20/20

The last full trading week of the year saw gains across the main sectors on Wall Street, although the momentum of the “vaccine rally” became a bit weaker due to technical factors. Following last week’s pullback and the early-week spike in volatility, the choppy but bullish post-Fed trends were comforting for bulls, as the risk of a sizable overbought correction declined. Global risk assets provided support for U.S. stocks despite the lingering fears of a no-deal Brexit. European assets surged to new recovery highs, finally erasing their “winter-wave” losses. While the stimulus saga is still not over, the two sides will likely strike a deal before the end of the year, and small-caps could remain in the driver’s seat thanks to the fiscal boost.

This week’s economic releases provided plenty of major surprises, with most of them being negative. The retail sales report and the weekly number of jobless claims were the most painful for investors, as both pointed to a weak patch in the consumer economy which comprises a much larger share of U.S. GDP than the currently stronger manufacturing sector. On a positive note, the Markit manufacturing and services PMI’s painted a more promising picture of the domestic outlook. That said, the Philly Fed Index missed by a wide margin while the housing market sent mixed signals with the NAHB coming in well below the consensus estimate.

On Tuesday, we will have the last GDP readings of 2020 reported. Short interest continues to decline as the year-end rally reaches a short term top and traders cover year end positions – potentially giving some extra life to stocks that have been suppressed by short sellers this past quarter. We have two weeks of trading left in the year both of which will be shortened weeks. The market will close at 1:00pm EST on this coming Thursday.

As we look ahead to 2021, we would like to examine one of the most beat up sectors over the past 4 years, the energy stocks and services sector.  This past year put in a multi-year low in the energy sector. Regardless of green initiatives, the USA is not getting off oil anytime soon. As demand and growth return from the Covid pandemic, energy is a required commodity. The last four years saw the US increase its domestic production in energy to become independent. In the process, we saw supply flooded into the market in a sort of shock which suppressed pricing as new energy policies were put in place. The market has now absorbed these increases and green pressure on fossil fuels will only cause them to be taxed more heavily.

We believe the energy sector is set to produce a four year run into 2024, from the price of oil to related energy service stocks.

An important indicator we examine for multi year turns in this space is insider selling. Insiders must think better days and higher prices are coming as well. This year saw the fewest insider sales in decade.

A seasonal look at energy and we see the first half of the year is usually kind to it.

XLE and OIH are two of our favorites for putting money to work during this next 4 year move in energy.

 

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